Tuesday, October 9, 2007
The law on the books, as we are fond of telling our students, is not always the same as the law in action. And the law in action is often only a small slice of the larger commercial environment. Even where a party might save money by breaching a contract, that party will usually perform -- not because it is worried about being sued, but rather because performing is the "right" thing to do. Those who have tried to install modern contract law in environments where social norms don't encourage the performance of promises have found that all the statutes and court decisions in the world can't create a hospitable contracting environment.
So how do you get a hospitable contracting environment? In a new essay, Morality, Social Norms and Rule of Law as Transaction Cost-Saving Devices: The Case of Ancient Athens, scholars Anastassios Karayiannis (Piraeus) and Aristides N. Hatzis (Athens) examine how the Greeks came to develop one of the earliest and most successful systems of the ancient world. Here's the abstract:
The importance of the institutional framework for economic development is widely accepted today and it is duly stressed in the economic literature. The protection of property rights, the enforcement of contracts and an efficient legal system are the pillars of the contemporary rule of law. However, formal institutions cannot function without being internalized by the citizens and without the backing of social norms. Morality and social norms are the major elements of the informal institutional structure, the social capital, which is also critical for social welfare and economic development. In this paper we will discuss both the formal and the informal institutional framework of Ancient Athens, which was a free market society with economic problems similar to contemporary market societies. Athenians developed a highly sophisticated legal framework for the protection of private property, the enforcement of contracts and the efficient resolution of disputes. Such an institutional framework functioned effectively, cultivating trust and protecting the security of transactions. This entire system however was based on social norms such as reciprocity, the value of reputation and business ethics. Conformity to social norms as well as moral behavior was fostered by social-sanction mechanisms (such as stigma) and moral education. The Athenian example is a further proof of the importance of morality and social norms as transaction cost-saving devices even in quite sophisticated legal systems. Their absence or decline leads inevitably to the need for more regulation, clear-cut rules, less judicial discretionary power and more litigation. Athenian law was pioneering in the development of rules and institutional mechanisms suitable for the reduction of transaction costs, many of them surviving in the most complex contemporary legal systems.